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Jana probes for weakness in Agrium’s armour

Date: Tuesday, October 2, 2012
Author: Boyd Erman, The Globe and Mail

Jana Partners has a long way to go before persuading Agrium Inc. shareholders that the fertilizer maker needs to be broken up, but the hedge fund may turn a few heads with its analysis that there is about 50-per-cent upside in the stock.

Jana has been working behind the scenes pitching its plan to investors and management for months. On Monday, it unveiled its analysis publicly for the first time. Jana founder Barry Rosenstein laid out his argument at the Value Investing Congress in New York City, a marquee event for value investors to present their best ideas. His 41-page presentation built up to one big number in the finale: $50 a share.

That is how much the hedge fund suggests is there for the taking in Agrium stock if management agrees to carve up the company into a fertilizer producer and a retail farm store chain, revamps how it allocates capital, and cuts costs by closing stores and other measures. As much as $20 would come from the split, $20 more from cost reductions and the rest from using capital more efficiently.

It is an aggressive valuation. The average 12-month price target of 24 analysts tracked by Bloomberg is $115.11, and the stock closed Monday up $1.69 at $103.69 in Toronto. That suggests Jana has some convincing to do.

Agrium immediately dismissed the analysis as “nothing new” and said shareholders would receive “far greater value, with less risk, under the company’s current strategy.” The company asserted in a release that there is “overwhelming shareholder support for the continuation of Agrium’s integrated strategy.”

Certainly, Jana’s heretofore quiet push for change at Calgary-based Agrium has yet to catch fire, and Agrium’s management has a lot of credibility with investors. But talking to stock owners, there are certainly a number of large shareholders who agree that Agrium is undervalued, and are willing to listen to ideas on how to fix that. Mr. Rosenstein said that is also what he is hearing.

“We’ve spoken to many shareholders in Canada and elsewhere and we’re confident shareholders want to see value-creating change,” he said in an e-mail response to questions. “We’ve been in many of these situations and at the end of the day shareholders tend to support their own economic interests, no matter where they live.”

Some shareholders canvassed by The Globe and Mail on Monday said they would like to see a split explored. They would also like to see more capital returned to investors via dividends and stock buybacks. And some are finding the company’s riposte to Jana’s presentation a little less than satisfying.

“I was a bit surprised to see the response from Agrium, to say that a lot of investors support them,” said one fund manager who counts Agrium among his largest holdings, and who said he had not been contacted by Agrium since Jana started agitating this summer. He said he has “difficulties” discerning the synergies between Agrium’s retail and wholesale operations, and that he would like management to survey investors on where they stand.

Still, there’s no doubt that even some shareholders who are open to the idea of a split are a long way from being ready to throw out Agrium’s management.

A second investor said his firm has “often asked management about the combination of retail and wholesale and whether it made sense and where were the synergies? If there were synergies, why aren’t other large fertilizer companies doing the same thing?” (All the investors contacted about Agrium spoke on condition their names not be used.)

Even so, he was “ a little surprised when they [Jana] told me what they were doing.” He said he “didn’t see the burning platform that usually you have when an activist has influence.” Because of that, he does not see high odds of Jana winning. “If management doesn’t stumble, they will ultimately be able to hold on to the business and run it the way they want.”

If there is a weakness in Agrium’s armour, it is the perception among those investors that the company is being defensive and not willing to engage in a constructive dialogue about the right way to close the gap between where Agrium’s shares trade and where shareholders think they ought to be.

Agrium risks being too haughty early in what could be a long campaign. Jana still has months to agitate before Agrium’s annual meeting, which would provide an opportunity to try a vote on forcing through a new strategy by replacing some or all of the board. Jana has not said whether that is something it is considering, but the possibility is out there.

“We’ve been able to accomplish what we’ve wanted historically without the need for a proxy vote, because we do our homework and companies know that we’ve got shareholder support if we need it, so there’s no reason to keep fighting,” Mr. Rosenstein said. “Sometimes that happens right away and sometimes it takes a while. But a proxy contest is always an option if necessary.”